AutoWeb, Inc. (NASDAQ:AUTO) Q4 2017 Results Earnings Conference Call March 8, 2018 5:00 PM ET
Jeff Coats - President and CEO
Kimberly Boren - CFO
Sean Mansouri - Liolios Group, IR
Sameet Sinha - B. Riley FBR
Ed Woo - Ascendiant Capital
Gary Prestopino - Barrington Research
Bruce Goldfarb - Lake Street Capital
Good afternoon, everyone, and thank you for participating in today’s conference call to discuss AutoWeb’s Financial Results for the Fourth Quarter and Full-Year Ended December 31, 2017.
Joining us today are AutoWeb’s President and CEO, Jeff Coats; the Company’s CFO, Kimberly Boren; and the Company’s outside Investor Relations Advisor, Sean Mansouri, with Liolios Group. Following their remarks, we’ll open up the call for your questions.
I would now like to turn the call over to Mr. Mansouri for some introductory comments.
Thank you. Before I introduce Jeff, I remind you that during today’s call, including the question-and-answer session, any projections and forward-looking statements made regarding future events or AutoWeb’s future financial performance are covered by the Safe Harbor statements contained in today’s press release, the slides accompanying this presentation and the Company’s public filings with the SEC. Actual events may differ materially from those forward-looking statements.
Specifically, please refer to the Company’s Form 10-K for the full-year ended December 31, 2017, which we anticipate filing on or before March 15, 2018, as well as other filings made by AutoWeb with the SEC from time-to-time. These filings identify factors that could cause results to differ materially from those forward-looking statements.
There are slides included with today’s presentation to help illustrate some of the points being made and discussed during the call. The slides can be accessed by visiting AutoWeb’s website at autoweb.com. When there, go to Investor Relations, and then click on Events and Presentations.
Please also note that during this call and/or in the accompanying slides, management will be disclosing non-GAAP income and non-GAAP EPS. And for year-over-year comparisons, prior year results with the exception of cash flow from operations, for all presented are adjusted to include the Company’s specialty finance leads products which was divested on December 2016. These are non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today’s press release and/or in the slides, which are posted on the Company’s website.
And with that, I’ll turn the call over to Jeff.
Thank you, Sean. Good afternoon, everyone.
As announced earlier today, the Board of Directors and I have been discussing a succession plan for several months. After more than a decade of leading AutoWeb and 20 years on its Board of Directors, and after the Board completes its process and a new CEO is named during the coming months, I will be stepping down to begin the next phase of my life.
Also announced earlier today, Kimberly Boren will be stepping down as Chief Financial Officer to pursue another opportunity. The Company will initiate a search for a new permanent CFO but is in very good hands with senior Vice President and Controller Wesley Ozima as interim Chief Financial Officer as he has served in AutoWeb’s finance and accounting organization for nearly 14 years. We thank him for her many years of service and wish her all the best in her future endeavors.
Despite recent struggles with our traffic acquisition, we dramatically increased the Company’s addressable market over the last several years through targeted acquisitions while establishing AutoWeb as the largest supplier of online leads to every major OEM in the country.
During the fourth quarter, demand for leads and clicks from our customers remained strong. However, we were unable to fully meet this demand due to higher traffic acquisition costs. This led to lower revenue and profitability than we have previously anticipated. While our Q4 results certainly were not acceptable, we believe we’ve been taking the appropriate actions to address these traffic issues and mitigate the impact to profitability. Just last month, we realigned our headcount and expect to reduce operating expenses by $2 million on an annual basis.
Before commenting further, I would like to turn the call over to Kim and have her take us through the important details of our Q4 financial results. Kim?
Thanks, Jeff, and good afternoon, everyone.
As noted in our press release today, for year-over-year comparative purposes, the results for all periods presented and discussed on our call today exclude our specialty finance leads product, which was divested on December 31, 2016.
For those of you following along with our earnings presentation, on slide three, you can see that our fourth quarter revenue came in at $33.3 million, down from $39 million in adjusted year-ago quarter. The decline in revenue was due to unfulfilled demand for our leads, as a result of higher traffic acquisition costs as well as channel mix issues, resulting from a lower retail dealer count, partially offset by continued strong growth of advertising click revenues which increased 23% to $7.9 million.
Moving to slide six, you will see that we delivered approximately 1.8 million automotive leads during the fourth quarter compared to 2.3 million last year, a reduction resulting primarily from the traffic issues, discussed earlier. Note that this lead volume reflects all leads sold to both the retail and wholesale channels. As a reminder, the retail channel comprises leads sold directly to dealers whereas our wholesale channel primarily reflects leads sold to OEMs that are then distributed to dealers in their corporate leads program at the OEM’s discretion.
And on slide seven, you’ll see the dealer count stood at 24,242 at December 31st, up from 24,191 at the end of Q3. Note that the increase was largely driven by increased dealers on our OEM wholesale program, partially offset by a decline in retail dealers. Similar to our leads breakout, this dealer count reflects all of the dealers we sell leads to including both the wholesale and retail channels for new cars.
Moving on to advertising, as mentioned earlier, our advertising revenues increased 14% to $9.2 million, compared to $8.1 million in the year ago quarter. The increase was due to continued strong growth in click revenues.
On slide eight, you’ll see click revenues increased 23% to a record $7.9 million compared to $6.4 million in the same period last year. The increase was driven by higher click volumes into our wholesale channel.
Now moving to slide nine. Gross profit during the fourth quarter was $8.1 million compared to an adjusted $14.2 million in the year ago quarter with gross margin coming in at 24.4% compared to an adjusted 36.5%. The decline was driven by higher consumer acquisition costs as well as amortization costs associated with DealerX.
Total operating expenses in the fourth quarter were $48.4 million compared to an adjusted $12.4 million last year. The increase was largely driven by a one-time non-cash goodwill impairment charge of $37.7 million. We evaluate the carrying value of enterprise goodwill for impairment at a minimum on an annual basis. During 2017, we performed our annual impairment test, effective October 1st, by comparing the carrying value of AutoWeb to its fair value, based on market capitalization at that date. This resulted in the $37.7 million charge.
On a GAAP basis, net loss in the fourth quarter was $65.8 million or $5.22 per share on 12.6 million shares, compared to adjusted net income of $1.4 million or $0.10 per share on 13.4 million shares in the year ago quarter. The decrease was driven by the aforementioned goodwill charge as well as a $25.4 million non-cash tax charge, primarily related to the Tax Cuts and Jobs Act and the valuation allowance on our remaining balance.
For the fourth quarter, non-GAAP income which adds back amortization on acquired intangibles, non-cash stock-based compensation, acquisition costs, severance costs, gain or loss on investment or sale, litigation settlement, goodwill impairment and income taxes was $0.1 million or $0.01 per share, compared to an adjusted $4.7 million or $0.35 per share in the fourth quarter of 2016. The decline was primarily driven by lower revenue and gross margins, resulting from the aforementioned challenges with traffic supply.
Cash used in operations in the fourth quarter was $1 million compared to cash provided by operations of $6.2 million unadjusted in the prior year quarter. We also repurchased 0.7 million of stock during the fourth quarter and have an additional 2.3 million authorized for future purchases.
On slide 10, you will see that our tax balance remains strong with cash and cash equivalents of $25 million in September 31, 2017 compared to $38.5 million at December 31, 2016. The decrease was driven by debt pay-down, stock repurchases, the DealerX licensing agreement and the usedtrucks.com URL purchased in 2017. Total debt at December 31, 2017 was reduced to $9 million compared to $23.1 million at the end of 2016.
In closing, it has been a pleasure being part of AutoWeb and leading its finance and accounting organization over last 10 years. And I will do everything I can to ensure a successful transition of the role to Wes and the team.
With that, I’ll now turn the call back over to Jeff. It’s been a pleasure.
Thank you, Kim.
As I mentioned earlier, we experienced significant challenges in traffic acquisition during the fourth quarter. We were trending quite positively at the end of the third quarter, before hitting somewhat of a wall in October. We believe this was in large part due to dramatically greater SEM spend from several of our competitors, which ultimately drove up our prices to acquire traffic.
For context, we spend approximately $6 million to $7 million per month with our largest traffic suppliers, while it’s our understanding that some of our competitors have each been spending upwards of $25 million per month to acquire traffic during Q4.
As I stated in the past, we remain committed to profitability over growth and will not spend excessive amounts on traffic acquisition to satisfy growth objectives. Ultimately, we do not believe this estimated level of spending from our competition is sustainable. So, while our near-term results are being impacted, we do expect market conditions to normalize over the course of the year, which should enable us to acquire traffic at a more reasonable cost. Despite the rising cost, we’re continuing work with our traffic partners to optimize our SEM methodologies and rebuild our high-quality traffic streams, so that Company can be prepared to return to growth as market conditions normalize.
Due to the competitive dynamics discussed and the anticipated management transition, we cannot provide an exact timeframe to this resolution. However, note that the Company will prudently manage its cost structure to maintain profitability as reflected by the headcount realignment, discussed earlier.
A few weeks ago, Billy Ferriolo resigned due to personal reasons. He was one of the founders of the Tampa based company we acquired in 2010, which was instrumental in AutoWeb’s successful growth over the past several years. Our strong team in Tampa remains in place and has received increased support from Google to assist in the continued recovery of our consumer acquisition efforts. We also wish Billy all the best in his future endeavors as well.
We also remain in the early stages of implementing the new DealerX ROiQ platform. As you may recall, we licensed the ROiQ technology from DealerX in October of last year. This technology records countless consumer-driven behavioral events online and scores them in real time to determine what content to show a consumer across multiple devices. We plan to utilize this technology to support both our clicks and leads products as we can target the right consumer and monetize the event in multiple ways.
In addition to the monetary benefits, the DealerX platform provides us with an entirely new source of traffic, which builds upon our strategy to diversify our consumer acquisition partners, especially given the competitive dynamics mentioned earlier. It is important to note that we have the exclusive rights as the other third-party service providers like ourselves to use the DealerX technology to generate leads, traffic and other results and output for the auto industry.
In our clicks business, we continued to increase click volumes with existing clients and have added new dealers, OEMs and advertising customers. As I mentioned in the past, our strong growth in clicks up to this point has only come from a small number of customers, so there is plenty of room for ongoing growth. It should also be noted that even though we have seen strong growth in click revenue, this growth has been limited by the elimination of lower quality traffic campaigns beginning in Q2 2017.
On slide 14, you’ll see J.D. Power/LMC Automotive is forecasting 2018 total light vehicle sales to be just under 17 million units, a decrease of 1.4% from 2017 and retail light vehicle sales are forecasted at 13.7 million units, which is a 1.7% decrease from last year.
As noted in our press release today, given the anticipated management changes at this time, we will not be issuing a 2018 business outlook. Though we find ourselves in a challenging period as we work to restore our retail dealer footprint and traffic acquisition methodologies, we continue to have robust relationships with our OEM partners and they continue to have strong demand for our core leads and traffic products.
We are still in the early stages of expanding and optimizing our proprietary AutoWeb traffic solutions and demand for high-quality website traffic and the automotive industry continues to grow. Also, while we are committed to prudently managing our expenses during this management transition, we are actively enhancing the experience and capabilities of our strong portfolio of consumer-facing automotive research sites, which includes usedcars.com, car.com, autoweb.com, usedtrucks.com and autobytel.com.
As we continue to optimize our consumer acquisition practice, we are embracing new platforms and strategies as we look to accelerate the diversification of our revenue and traffic streams.
Operator, at that time, we will open the call for questions.
Thank you, sir, [Operator Instructions] Our first question comes from Sameet Sinha of B. Riley FBR. Your line is now open.
Yes. Thank you, Jeff. Thank you, Kim. A couple of questions here. So, one thing about traffic, so how -- I agree, you’re not giving guidance, but how have the trends been so far in Q1? Are you seeing the same pressures you saw in Q4, and that’s how we should be thinking about for the next -- for the foreseeable future, until a resolution is reached there or is it -- are the trends worsening at this point? Secondly, could you talk about -- you spoke about some cost cutting initiatives -- and where exactly are you taking those cuts? Some details will be helpful. Thank you.
The trends have been choppy in the first quarter. So., in January and February was consistent with what we were seeing in the fourth quarter. March is improving significantly. And so, too early to tell, but for your assumptions and modeling, I would probably assume the same trends for the balance of the year. In regards to the headcount that came out, it was really across all functions. It was focused a little bit heavier on our operations in Los Angeles which were some of the consumer-facing and data operations; we’ve gone heading consolidated those functions into Irvine. But again, overall, it was across multiple functions.
Thank you. Our next question comes from Ed Woo of Ascendiant Capital. Your line is now open.
I had a question in terms of the industry. 1% decline doesn’t seem like much. Is there anything that we should be aware of that affect on how dealer and OEM spends for leads next year?
I don’t think it will have a negative impact on the way dealers or OEM spend for leads next year. If anything, it may help. I mean, what we normally see is when foot traffic in the dealership starts slowing down, they turn to their other traffic sources, lead providers, leads off their own websites, and things like that. So, I think we’re in a period right now that is probably reasonably positive for those of us in the digital marketing business.
Great. And then, another question I have is, last year you guys were talking about wrapping up your used car business, how is that going?
We’re still investing behind the used car business. It has been impacted somewhat by our ongoing traffic issues. But, it is still a priority for us and it is still something that we’re expending resources on. And we do still believe it is very big opportunity for us as we continue to grow towards it.
Great. And then, my last question is, obviously, you guys have made some changes to kind of offset the traffic issues. But, what do you think are some of the biggest risks that could possibly change that? And how much of it is you think is competitor spend versus any type of algorithm changes by Google?
I would say, based on our pretty extensive conversations with our friends at Google, this is not algorithm changes. It’s just raw dollars coming into the market. I think, if you look back at what happened in the probably beginning in the second quarter but really pronouncedly picking up in the third and fourth quarters, particularly, if some of the folks that we compete against came into the market, other new models like Carvana, which we do not really compete against but which is also spending heavily in the SEM markets, there’s just massive amounts of traffic coming into the markets. Our understanding is CarGurus, cars.com, AutoTrader, I mean we can see some level of that in the search markets themselves. But you can also read about it just by reading what their commentaries are in their quarterly results and/or in their original S1s. They certainly want to come out of the gates with some strong growth rates, and a really great way to do that is to spend a lot of money and buy traffic. I think, most of us in the industry, most of the people that we talk to, don’t believe, however, those spending levels are sustainable. So, it should settle down as we move into 2018 but that does remain to be seen.
Thank you. Our next question comes Gary Prestopino of Barrington Research. Your line is now open.
Hi, Jeff. Hi, Kim. I wasn’t going to ask that you mentioned competitors that were spending, but fully aware of what some of these other online platforms are doing. But, I guess the question that I would have is, is this a permanent kind of secular shift change, Jeff? I mean, you say that you don’t think they can keep spending money like this but AutoTrader is not public. I know, they’re having their own internal problems, but cars.com and CarGurus are and they’re basically meeting or exceeding their numbers. So, at least in this latest quarter, when there was some heightened spending. So, any commentary you could share, or thoughts on that would be very helpful.
You know, Gary, I certainly don’t have a crystal ball and I certainly don’t have any inside knowledge. But from talking to people in the search business and around the automotive industry that have seen things like this happen in the past, the expectation is that they just cannot continue to spend at these really extremely high level for extended periods of time. Now, right now, neither one of them, as I understand it or certainly one of them is not being measured, based upon their bottom-line margins at all. They’re only being measured on growth. And it’ll maybe be a little easier for them to continue to spend some of those dollars. But again, we just don’t think it’s sustainable over an extended period of time. We could be wrong. It could be a secular shift. But from talking to experts and our partners on the search side, they at least at this point, don’t think that that’s the case. We are expanding our search partners, we are doing more with Facebook and Credio and Instagram. We have also done this new license with DealerX that we’re still in the very, very, very early phases of implementing. So, we remain hopeful that we can in fact get our traffic generation back at the levels that we needed to be and the margin profiles that we needed to be, but obviously we have some work cut out for us to do that.
Okay. That’s fine. And then, could -- Kim, could you maybe just go into -- with this good will imperilment, it’s $38 million, which is more than 30% of your preannounced equity value in the market. So, is this really pertaining to valuations that were assigned to the acquisitions and that the acquisitions are not delivering returns that you expected or is it something else that’s causing this write-down?
That’s a good question, Gary. I wouldn’t say that the acquisitions are not delivering the returns that were expected since the goodwill is not an asset that you amortize. I would say that because of the performance on the lead side of the business that impacted the stock, which is primary factor in the valuation. So, that’s what the driving factor is, less from the cash flow and the business perspective and more so from a market perspective.
And for what it’s worth, the measurement date of October 1st, which is the measurement date we’ve been using every year for several years, was very close to our 52-week low trading price, if not right on it, but certainly very close to it. And so, it’s one of those perfect storm kind of the situations. And then, the tax law changes, which affected the write-downs we had to take in our tax assets also exacerbated this because it put us in a negative three-year EBITDA position as part of doing all that.
[Operator Instructions] Our next question comes from Bruce Goldfarb of Lake Street Capital. Your line is now open.
Just a few questions. The lead business, given the contraction of ‘17, when do you guys think that -- when do you expect it to start to stabilize?
We’re still in the midst of working to stabilize it. I think that it’s not a demand problem that we have, it’s a supply problem. If we equally had a demand problem, we would be a whole lot worried about it. But it’s really almost entirely a supply problem. So, as we continue to rebuild our traffic supplies as we continue to improve the margin coming out of our traffic supply, we should be able to rebuild leads. I mean, leads are pretty standard, they are pretty basic. Its somebody’s name and telephone number and email address and may be their address. And no matter what a dealer does, no matter what social methodology they use, no matter what a salesman does, they need to capture that information to have an ongoing dialogue with the consumer. And we’re kind of the front line of that. So, it's not that leads are out of favor, it's simply right now we're just having a real supply issue. And we do expect to work through that. We do expect to make progress on that during the course of this year. Our new DealerX license we think will help. But, we also think we'll see some help coming out of our own direct relationships with Facebook and Credio and other players like that as we begin to generate more traffic from them as well.
Okay. And then, do you expect any material contribution from used car leads in ‘18? And when do you think -- so, when do think will -- what part of the year do you think they'll start to show or start to have an impact?
I would say honestly, we will start seeing some benefit from used car leads during the course of the year, but it’s not going to be as robust as we would have initially expected, again, in part because of the ongoing traffic issues. The traffic issues that use just the way they do, new. And so, we definitely are still feeling that impact unfortunately.
And then, PTC has performed well. And I know you're not really projecting in the ‘18, but what -- I don't know, could you guesstimate a growth rate for ‘18 for that segment?
I would -- we would probably still expect it to grow nicely during the course of this year. It is impacted somewhat by our ongoing traffic issues. But, we would still expect it to grow at a double digit rate this year.
Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Coats for closing remarks.
Thank you all for joining today. I know, the conversation was not the most heartwarming or what you wanted to hear. 2017 was a tough year for us. Certainly, we made a lot of progress in identifying where our issues are. We are working hard to address those during 2018. I want to thank everybody for joining us today. I also sincerely want to thank our team of extremely dedicated employees for all of the hard work and all of the extra hours that they've been putting in over the many, many months we've been working through this.
And in closing, I'd also like to personally thank Kim Boren for her insights and hard work and dedication of the Company over the years she's been here. It has been a true pleasure to work with you, Kim. So, thank you very much.
Thank you, Jeff, likewise.
Thank you, operator.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.